After the financial crisis, the most dominant economic story has been the Federal Reserve and its unconventional monetary stimulus, Quantitative Easing or QE.
Some say QE is just a swap or that commercial banks are exchanging one government asset treasury for another central bank reserve.
Maybe at the start, but the program has morphed. Now, the Federal Reserve is buying mortgage-backed bonds, government bonds, and corporate bonds from pension funds, mutual funds, hedge funds, etc. The seller receives a bank deposit, and reserves provided by the central bank offset the commercial bank’s liability.
Have Any Concerns?
This past December, after a 7% year-over-year inflation increase, Federal Reserve Chairman Jerome Powell reversed course. He declared that inflation was not transitory and laid out his plan for how the Fed would start fighting it.
In capitalism, the government’s role in creating new money is limited. It mostly moves around money that is already in the economy, funds itself by collecting taxes or selling government bonds, and then spends that money back into the economy.
There is no way to know for sure. Still, when the Fed adds money to the economy by buying bonds from non-banks, the stock market seems to go up. When they subtracted cash from the economy by not reinvesting mortgage payments (quantitative tightening), it went down.
Quantitative tightening (QT) is similar to what would happen if somebody who was paying your bills suddenly stopped doing so and started to reduce your bank account by the total amount of bills previously paid.
The European Central Bank, Sweden, Denmark, Switzerland, and Japan have all implemented some form of ‘negative interest.’ However, none of these countries or regions have seen commercial banks charging their customers for depositing money.[i]
In February of 2019, two months after telling the world that the Fed balance sheet reduction plan was on autopilot, Chairman Powell announced that the Fed would soon unveil a plan to end it
Securities are offered through Cambridge Investment Research, Inc., a Broker-Dealer, member FINRA/SIPC. Investment advisory services are offered through Cambridge Investment Research Advisors, Inc., an SEC Registered Investment Adviser.
